BAM BLOG: When buying based on cost doesn’t make sense

Before & AfterMarket (BAM) Blog: Most of the public debate about onshore versus offshore manufacturing has to do with the cost of production and domestic-market competitiveness. But in many cases, the debate should not be exclusively about cost – it should be about trust.

The defense market is one such example. Military and aerospace equipment can literally be a matter of life or death. However, cost has arguably become the most significant factor. Due to budget cuts, the population of major defense OEMs has been shrinking. Because of the dwindling demand, chip makers have cut back on the design and supply of mil-spec components, prompting many military OEMs and subcontractors to source less-expensive commercial off the shelf (COTS) components – many of which are manufactured offshore.

However, the savings may not be as high as many buyers think. Competitive state-of-the-art fabrication facilities are starting to make an appearance in the United States again. That being said, if attractive offshore cost isn’t the major purchasing factor, what criteria should buyers use when evaluating their partners?

In the defense market, the issue ultimately comes down to trust. In this regard, onshore manufacturing has a number of advantages, according to “Onshore Silicon for Long-term Supply Security: Foundry Selection for Military Application,” published on the Global Semiconductor Alliance (GSA) Global Forum website (http://www.gsaglobal.org/forum/2010/2/articles_on.asp). “Military applications are subject to increasingly stringent requirements for domestic design, production and verification, while also requiring technology availability over long time periods,” writes author Kirk Peterson, ON Semiconductor CFD fab manager. For these and other reasons, he states, “Companies that design and supply products for military use must carefully consider the foundry partners to whom they outsource their IC fabrication.”

Military products have lifetimes that are often measured in decades, Peterson points out, and the implications and costs associated with component obsolescence and end-of-life (EoL) can be severe. The situation is exacerbated by the fact that the majority of military designs are unlikely to be implemented in newer, cutting-edge processes. “It is essential, therefore, that the evaluation criteria for a suitable foundry partner should also take into consideration the organization’s process longevity history and their stated commitment to future support,” he writes.

Onshore companies such as Rochester Electronics LLC have stepped in to fill the gap between semiconductor obsolescence and long-term customer demand — manufacturing discontinued products with the full support and trust of the original component manufacturer (OCM) using original die and IP where possible.

Onshore facilities that manufacture for the military must also comply with stringent security requirements mandated by the government. The National Defense Authorization Act (NDAA), for example, specifies the need to “identify vulnerabilities in the supply chain of each program’s electronics and information processing systems that potentially compromise the level of trust in the systems.” This includes an assessment of both military and commercial sources to the Department of Defense. In line with the NDAA, the National Security Agency has also established the Trusted Access Program Office (TAPO). For a foundry to be eligible for the TAPO program, the company must demonstrate that it is abiding by a variety of security requirements including: chip database media; metal masks; back-end (after first metal); finished product; and post processing.

Outside of the issues of technology, support, services, compliance, and IP protection there are other factors that can tip the balance in favor of onshore manufacturing. From a logistics perspective, there’s an opportunity to reduce shipping costs and lead times, while ensuring that potential problems are quickly rectified. Suppliers such as Rochester, which has partnered with On-Semiconductor and GMCH, manufacture to volumes specified by the market rather than estimated volume targets. This virtually eliminates the risk of excess inventory and waste.

Onshoring versus offshoring has become a hot topic throughout the electronics industry as the debate continues over risk and reward. In the defense market there can be no risk when it comes to the supply chain, and companies that manufacture onshore typically garner more trust than companies manufacturing abroad.